An insured needs a surety bond. When they fill out an application, they are prompted to input their Social Security number. Confused, they reach out to their insurance agent for clarification on why this information is required. 

Now, unless the agent is attuned to the intricacies of surety bond underwriting, their answer will probably be “Because the insurance company requires it." Unsatisfied with this answer, the insured still provides this information—because they need the bond—but the question lingers in both the minds of the agent and their customer. 

But don't you want to provide a better answer than that? Here's how to explain this unique requirement to your customers. 

Surety Bonds: A Process Unlike Any Other 

Traditional insurance products don't require applicants to provide a Social Security number, so what makes surety bonds so special? A lot, actually. 

Unlike other types of insurance, surety bonds—excluding fidelity bonds—do not protect the person who purchases the bond but rather the person or entity requiring it. For example, auto dealers need to obtain a bond as a prerequisite to receiving a business license. However, the license bond does not protect the dealer, but rather the state department of motor vehicles and the dealer's customers. 

Additionally, if a claim is made against the dealer's bond, they are required to repay the surety company for all claims and claims handling expenses because of the indemnification provision. All surety bonds are indemnified, meaning all principals—persons that purchase a bond— must repay the surety company for valid claims. Claims made against surety bonds are completely avoidable and only occur if the principal commits fraud or engages in unethical conduct. 

In essence, think of surety bonds as a line of credit that the principal must pay when and if it is used. 

All About the Risk 

The unique nature of surety bonds compared to other types of insurance requires a similarly unique underwriting process. When underwriters determine whether to issue a bond, they are considering two factors. One is the likelihood that the principal will repay the surety company for valid claims. The second is the likelihood that a valid claim will occur. 

Aside from a review of a person's financial statements, which surety companies do for high-risk bonds, what better way to determine the likelihood of getting repaid than to examine the applicant's credit history? Unless you know the person dearly, the answer is: there isn't one. 

Surety companies need to run soft credit checks—that don't affect the applicant's credit—on applicants to assess the risk that the applicant won't repay them in the event of a valid claim. 

To run the check, credit bureaus use a Social Security number when generating the report to identify the individual and their loan and payment history. 

Further, to determine the likelihood that a claim will occur, surety companies will consider the claims history of the bond as a whole; examine whether or not the applicant has had any valid claims made against a previous bond; and determine the applicant's years in business. 

These factors help surety companies make informed decisions on whether issuing an applicant's bond will result in claims. This is why customers oftentimes must input their years in business on bond applications. It also explains why the same applicant may pay more for the same bond type in different jurisdictions—if one jurisdiction has a history of high bond claims the surety company will consider the bond riskier. 

Surety companies consider these factors when determining an applicant's premium rate and eligibility. Applicants with good credit and multiple years of business experience often get the best rates while those that don't typically pay higher rates or get declined. 

Certain surety bonds are considered so low risk that surety companies can issue them "instant issue," and the process for providing them is simple. The customer submits an application and then the carrier or broker copies this information onto the bond form. 

Whenever your customers are not required to provide a social security number, the bond being applied for is an instant-issue bond that has no underwriting criteria. 

Surety companies advertise their ability to write these instant-issue bonds as a sign of their technological prowess and innovative solutions. But what these companies don't tell you is that whenever you or your customers need a higher-risk bond that is subject to credit and financial underwriting, the carrier must manually review the submission and review the credit report and financial statements before providing a quote. 

Tim Rotondi is head of marketing at BondExchange.